A new federal law poised to take effect soon will impose new disclosure duties on the individuals and businesses that form new entities and the professionals who assist them.

The Corporate Transparency Act was passed by Congress as part of the Anti-Money Laundering Act of 2020. Its purpose is to provide information to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) regarding the beneficial ownership of entities, such as corporations, limited liability companies, limited partnerships, professional corporations, etc. – either formed in the United States or registered to do business in the United States – to assist FinCEN in identifying entities that may be involved in money laundering, tax evasion, organized crime and/or other illegal activities.

In addition to disclosures regarding beneficial ownership, the Act requires that certain information be provided to FinCEN regarding any person who actually files documents with a state agency (such as a Secretary of State) to create a new entity or entities and those individuals who either direct or control such filings, such as an individual equity owner or an officer of such an entity.

What Information Must Be Disclosed?

In December 2021, FinCEN issued Proposed Regulations to implement the provisions of the Act. In general, the Proposed Regulations require that any entity which is determined to be a “Reporting Company” under the Act must provide certain information to FinCEN regarding any individual who owns 25% or more of such Reporting Company or who otherwise directly or indirectly exercises substantial control over the Reporting Company (a “Beneficial Owner”) and those who either filed the new entity documents or directed or controlled the filing of those documents (an “Applicant”).

The Proposed Regulations would require each new Reporting Company formed after the law’s effective date to file with FinCEN within 14 days of the date of formation. Those entities in existence at the time of the effective date of the final regulations (as designated by FinCEN) will be required to make the same disclosures within one year of the effective date.

What Entities Are Exempt?

Under the Act and the Proposed Regulations, every entity will be considered a Reporting Company unless an applicable exemption applies. Exemptions include otherwise regulated businesses, such as licensed insurance companies, banks, securities brokers, and public companies. Also exempt are subsidiaries of many of the exempted entities and truly dormant entities.

There is also a statutory exemption for “large operating companies” which are defined as entities with a fiscal presence in the United States that have both more than 20 full-time employees and more than $5 million in gross receipts or sales in the prior fiscal year as reported to the Internal Revenue Service.

What Data Must Be Included?

Once FinCEN sets an effective date and implements its final regulations, if your entity is determined to be a Reporting Company, the entity will be required to provide certain information to FinCEN regarding the company itself, each Beneficial Owner, and each Applicant. Generally, that information is the name, address (business or residential depending upon the circumstances), date of birth, and some form of identifier, which for the Reporting Company would typically be a taxpayer identification number, and for Beneficial Owners and Applicants would be a driver’s license number or passport number, with a copy of that photo identification document.

For individuals who are Beneficial Owners or Applicants who may be concerned about providing their personal information and photo identification to the Reporting Company for filing with FinCEN, there is a process in the Proposed Regulations for those persons to separately obtain a FinCEN identifier number which can be provided to the Reporting Company as an alternative.

What Needs to Be Done Now?

As noted above, the Proposed Regulations are not yet in effect and are subject to amendment. Therefore, there are no filings under the Act that you need to make at this time.

However, since the Act has been signed into law, it would be prudent for all individuals and businesses likely to be subject to these new requirements to be aware of the information that they will almost certainly be required to report to FinCEN after the effective date is designated.

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